Business Debts

Why Can’t I Refinance My Mortgage Since I’m a Self-Employed Sole Proprietor?

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Written by Steve Rhode

Question:

Dear Steve,

In 2016 I fell upon bad financial times and fell behind in my mortgage with Mr.Cooper for 5 months. I prevented a foreclosure by settling on a loan modification that changed my loan to 54 years at a 5.875% rate. In which only about $160. of my approx. $2000.00 monthly payment went to the principal. I have since repaired my credit dramatically and trying to refi to pay off the loan sooner and take advantage of the current low rates. The agent from Mr.Cooper has now told me after a month of back and forth that currently conventional loans aren’t offered to sole proprietors.

  1. Does my situation fall into any of the complaints filed about Mr.Cooper?
  2. Are conventional Mortgages currently offered to Sole proprietors? 30+years of being self-employed.

Sean

Damon Day - Pro Debt Coach

Answer:

Dear Sean,

You should have read the first answer I wrote to your question. The computer chewed it up and didn’t save it. But let’s hope this one is even more brilliant. At least I’ve given your situation a lot of contemplation today.

There are actually a few things going on here.

It Can be Tough to Qualify for a Mortgage When You are Self-Employed

We have to acknowledge that it is tougher to get qualified for a mortgage based on the type of financial documentation the typical small business has on hand.

The business wants to minimize income and maximize deductions to keep the tax bill as low as possible. However, when it comes time to refinancing or getting a new mortgage, the lender wants to see as much income as possible on the documentation. Typically this documentation is in the form of tax returns.

Companies have tools to use for this sort of thing. For example, the MGIC self-employed worksheets can help find some balance. As they say, “As business owners, the goal for self-employed borrowers is to maximize income yet reduce tax liability. The problem with that is reducing tax liabilities minimizes taxable income and makes qualifying for a loan more challenging.”

In your situation, the mortgage company Mr. Cooper did give you a mortgage at some point. They even modified the mortgage when you were struggling. But you say they are not interested in refinancing the current modified mortgage.

In 2018 Mr. Cooper Mortgage was talking about helping self-employed people to obtain a mortgage. They said, “If you are self-employed or have a side business that generates additional income, you will need tax returns from the last two years. Lenders will ask you for your taxable income, which means they need to know the amount you report AFTER deductions. The simple question to ask: What is the amount that your income taxes are based upon? To find this, you need to know whether you file as a sole proprietor (using schedule C) or as an S-Corporation, LLC, or Partnership (using Schedule E). Once you determine this, your lender should be able to tell you what documents you’ll need to provide.” – Source

It is the Ball of Mr. Coooper Mortgage

There is no obligation for any mortgage company to refinance or give you a new mortgage if you don’t meet a government program or the company doesn’t want to take the risk.

Mr. Cooper mortgage does not have to give you any credit or wider understanding because you have been a customer for a long time. Your past track record is irrelevant if the mortgage company’s current policies and procedures don’t allow for lending your credit profile money. It is absolutely not personal.

It is Possible to Get a Self-Employed or Schedule C Mortgage

Rather than be dejected that Mr. Cooper rebuffed you, that does not mean you can’t refinance your mortgage if you can find a lender willing to take the risk.

I would suggest you talk to a mortgage broker. That is someone that represents several different lenders that might have programs for borrowers in your situation.

Then there are national mortgage lenders like Quicken Loans that assist self-employed borrowers in getting a mortgage.

Quicken Loans says, “There’s sometimes a misconception that it’s difficult to get a mortgage while self-employed. While preparation helps, it doesn’t have to be harder. The biggest thing to know is that there’s just some different documentation that’s required.

Mortgage lenders evaluate self-employed clients the same way they would look at anyone else. They want to see that you have a decent credit score. They’ll also look at the level of debt you carry to determine whether you can afford the mortgage payment associated with the loan. Finally, asset and income documents will be used to verify your resources.

Rules can vary based upon the lender and the type of loan you’re getting, so shopping around might be a little more difficult if you’re self-employed. This is because every lender has different policies in place regarding risk mitigation. As you look around, make sure you’re clear about what the lender will need from you.” – Source

I think you will find this page has some good advice and tips for a sole proprietor borrower.

Truth

Getting a mortgage as a sole proprietor is difficult, not impossible.

Another factor that can make you less attractive is unresolved business debt dragging your personal finances down.

You mentioned you’ve been self-employed for 30+ years, and that is awesome. It is also not an indication that any lender is willing to take the same risks and chances they did in the past.

Three decades ago, lending decisions were made by people. For better or worse, lending decisions today are made by artificial intelligence, algorithms, and automated rejections.

You must put the rejection of Mr. Cooper out of your head. It is irrelevant. And you must start to take a fresh look at your overall financial situation with fresh eyes to make you digestible today.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.





About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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